Can China save its stock market, and should it?

20:00, 26 July 2015

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The shockwaves from yesterday’s big selloff reverberated through today’s European and North American trading sessions. Indices on both sides of the Atlantic along with commodities like crude oil sold off on concerns that stock market turbulence in China could be both a cause and a reflection of instability and weakness in China’s economy which could impact its demand for raw materials and finished goods. US stocks also were influenced by today’s mixed durable goods report that saw June results beat the street offset by a downward revision to the May results. The Dallas Fed report, meanwhile, did not rebound as much as hoped, indicating that tough times for Texas (and likely other oil producing states) continue and the outlook remains dismal with WTI selling off again. USD had a tough day, underperforming its peers once again heading into a two-day FOMC meeting. The rally of recent sessions had indicated traders were expecting the Fed to move toward interest rate liftoff and a September hike seemed to be getting priced in to the dollar. This decline suggests that some traders may be starting to think otherwise with September expectations getting pretty crowded. EUR and other continental currencies like DKK and SEK took the greatest advantage of the USD weakness to post 1% plus gains even though the IMF warned on economic weakness in Europe and called on the ECB to keep its QE program running through its late 2016 objective. On the other hand some of the weaker currencies on the day included GBP on speculation of a June 2016 Brexit referendum, CAD on sensitivity to the oil price, AUD on its sensitivity to China demand for resource exports and CHF, suggesting some of the capital that had hidden there may be moving back out into the Eurozone. With no major economic reports for Asia Pacific countries today, the focus is firmly on the stock market crisis in China. Overnight, reports surfaced suggesting that the government’s next move may be to increase its own purchases of shares to shore up support. The question now, however, is whether government stabilization efforts could end up doing more harm than good? By stepping in with extreme measures (like stepping in as buyers banning selling by insidders and threatening to arrest short sellers) to support the stock market and keep it on life support, and keeping many stocks halted, one has to wonder if the government is delaying a washout that could be even worse later. Also by delaying, it could be setting the stage for even more instability down the road as nobody knows that the appropriate level for stocks are without government support/interference. In the long term, government, central bank and regulator moves may end up eroding confidence more than increasing it. Because of this, the financial crisis in China could drag on for a long time to come and potentially could evolve into a broader economic crisis. Baidu’s disappointing earnings after the US close doesn’t help the China bullish cause either, the question for today’s trading is how far are authorities willing to go to prop up the market, and if they fail, how much further could it fall? Corporate News Baidu CNY 11.19 vs street CNY 11.58, guides next Q sales to CNY 18.17-18.58B below street CNY18.77B Economic News Significant announcements released overnight include: US durable goods orders 3.4% vs street 3.2% US durables ex transport 0.8% vs street 0.5% US capital goods non-defense 0.9% vs street 0.5% US Dallas Fed (4.6) vs street (3.5) UK CBI total orders (10) vs stret (6) UK CBI selling prices 1 vs street (8) UK CBI business optimism 8 vs street 1 Germany IFO bus climate 108.0 vs street 107.2 Germany IFO current asesmnt 113.9 vs street 112.9 Germany IFP expectations 102.4 vs street 101.8 Upcoming significant announcements include: There are no major economic announcements scheduled for Asia Pacific countries today. 8:30 am BST Sweden retail sales street 4.0% 9:30 am BST UK GDP over quarter street 0.7% 9:30 am BST UK GDP over year street 2.6% 8:30 am EDT Canada industrial prices street 0.3% 8:30 am EDT Canada raw material prices street 1.0% 9:45 am EDT US flash Service PMI street 55.0 10:00 am EDT US consumer confidence street 100.0 Two-day FOMC meeting starts, announcement at 2:00 pm EDT Wednesday CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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